Industry and Subsoil Use: Why Mining Matters

I am continuing my notes on Kazakhstan's industry

(Beginning)

In the structure of industry, mining accounted for 59.6% of total output in 2014. Manufacturing accounted for 32.9%, of which more than half (16.9%) came from downstream processing of mining output (raw materials processing). This does not take into account the accompanying consumption by other industries, especially electricity. In other words, more than 75% of all industry in Kazakhstan is tied to the mining sector, that is, to subsoil use. Accordingly, growth of even 2–3% in these sectors yields overall industrial growth of 1.5–2%.

If we look at the physical volume of output over the years in the main mining sectors, the trend is far from encouraging.

Oil production has not grown since 2010, and neither has production of ferrous ores. Copper ore output has been flat since 2012, as has coal.

In other words, since the adoption of the new subsoil use law, Kazakhstan has seen complete stagnation in the mining sector.

There are many reasons for this. But the fact that a sector accounting for 75% of all industrial output is stuck in stagnation clearly points to misplaced priorities in the work of our ministries and agencies.

In fact, over the past several years we have seen no significant increases in reserves, either in oil or in solid minerals. All hopes were pinned on Kashagan, but everyone knows what happened to Kashagan. No one knows when it will be launched.

I have described the main problems in subsoil use many times. To be fair, there have recently been some modest steps forward, but for some reason liberalization applies mostly to solid minerals, while nothing is changing in oil.

Liberalization of subsoil use would attract additional investment into the country.

Subsoil use legislation:

Among the first priorities, I would recommend a complete amnesty for all fines imposed on subsoil users, extending exploration periods for all exploration blocks, and simplifying the procedures for approving and signing work programs, projects and supplementary agreements.

At low prices, subsoil users cannot finance their investment programs from their own funds, so outside financing is needed. Raising financing requires collateral, so the procedure for pledging fields to financial institutions should be completely overhauled. It should be made notification-based rather than permission-based. Even if a hidden sale lurks behind a pledge, a subsoil use right pledged as collateral can only be sold through an auction, so this risk is fully neutralized.

Throughout the entire period the subsoil use law has been in force, I have not heard of the state exercising its pre-emptive right to purchase fields even once. We should therefore move away from it.

In general, it would make sense to create a separate ministry responsible for subsoil use. At present, because two ministries handle it, standards differ and bureaucratic delays arise from the different subordination of certain committees.

Tax legislation:

I have written many times before about the flaws in the taxation of subsoil users in Kazakhstan. I will not repeat myself, but the tax system essentially needs to be reformed to stimulate production and exploration in the country.

The taxation system in the oil sector fails entirely to meet the principle of fairness or to encourage the sector's development, and in the uranium sector it makes no economic sense at all.

Local content and procurement rules for goods, works and services

The requirement to purchase Kazakhstani goods, works and services has naturally produced results, but with our accession to the WTO we will have to abandon it. If we want to develop local content, we should not be forcing people to buy Kazakhstani "slippers"; we should be increasing the depth of processing within Kazakhstan. This is a complex issue that requires further analysis. Stimulating domestic processing may be possible through fiscal incentives.

Therefore, in the current environment, we should start with what we can expand fastest, namely the extraction of natural raw materials in the country. Even at minimal profitability, this would bring additional budget revenue and create new jobs.

This is the simplest solution in the current environment.